THE TRUTH ABOUT TRUSTS
As an estate planning attorney, I often hear the following question from clients during an initial consultation: “I’m here because my friend says I need a trust, and I’ve heard that you prepare trusts. Can you do this for me?” While the answer of course is yes, my first response is to ask the client what his or her estate planning goals are. There are many different kinds of trusts that serve very different purposes. Trusts are a very complex subject, and we are planning several future articles on this subject that will go into greater detail. This article will review the three basic trust types: Testamentary, revocable trust and irrevocable trusts.
Consider the following example: A divorced man in his sixties, H, meets with an attorney to draft a Will. After his death, H wants his adult children, A and B, to ideally keep H’s personal residence within the family for a certain period of time, and to live in it if they want (Child B is currently living with H in the property and has no plans to move out). H believes that Child A should make all of the decisions concerning the house, including when to eventually sell it. H is also concerned about Medicaid and does not want the state to take his house should he need nursing home care.
Under these circumstances, H needs more than a simple Will. A simple Will leaving the house to A and B outright cannot accomplish the client’s goals because after a year, probate property is distributed to or vests in the beneficiaries, who would each be free to petition the probate court to sell the property. H needs a trust. But what kind of trust? This is where the specific client goals come into play.
There are three basic types of trust plans to consider: testamentary, revocable and irrevocable.
A. Testamentary Trust Plan
A testamentary trust is a trust within a Will. Rather than a simple Will that leaves the property to A and B equally, the Will leaves the property to A as trustee of the testamentary trust. The Will then sets forth the terms of the trust, and what A may or may not do with the property as the trustee of the trust. The trust will spring into effect once the Will is probated after H passes away. The biggest advantage of the testamentary trust to H is that it is generally less expensive “up front” for the attorney to draft than the revocable or irrevocable trust. However, the testamentary trust, because it is part of the Will, is subject to the Probate Court oversight once H passes away.
The Probate Court will charge additional filing fees to establish the trust at H’s passing. The Probate Court requires the filing of annual Accounts and filing fees for each year that the trust continues. The Court may also require the appointment of an additional attorney, known as a guardian ad litem, if any of the trust beneficiaries are minors or incompetent. The testamentary trust is also more open to attack by beneficiaries, because as part of the Will, it is a public filing. Lastly, it will not offer Medicaid protection under the existing law because the house is part of H’s probate estate. Current laws would require that Medicaid lien the property while H is alive and assert the lien claim during the probate administration. H’s estate would need to pay off the lien before title to the house was clear. However, if H was married, federal Medicaid laws favor testamentary trusts for other reasons.
B. Revocable Trust Plan
A revocable trust is a plan that is usually most effective for married couples. A major benefit of revocable trusts for married people that is not available to single people is that they can be drafted to reduce or eliminate federal and state estate taxes by fully utilizing the federal marital estate tax deduction. A future article will discuss these “tax planning revocable trusts” in greater detail. For both married and single people, a revocable trust also avoids the probate system and keeps the terms of the document private. However, it does not avoid the Medicaid lien because current Medicaid regulations consider a house in a revocable trust fully countable. A revocable trust plan will not really work best for H, as it would cost the same as an irrevocable trust but does not offer the nursing home protection that interests him.
C. Irrevocable Trust Plan
Lastly, H may consider creating an irrevocable trust. Under current law, the irrevocable trust document will accomplish four things for H 1) allow him to manage and maintain the real estate with as many powers as he chooses to create; 2) begin the current five year “look back” period on gifts to start if he eventually needs to qualify for Medicaid without incurring a lien on the real estate; 3) avoid probate court involvement; and 4) minimize capital gains income tax exposure when the residence is sold by utilizing the step up in basis or residential exclusion.
The major drawback to an irrevocable trust is that once the terms are decided, they cannot usually be amended without court approval. Also, the Trustee, in our example, child A, has a great deal of control. Ordinarily there might be a concern that such a Trustee may take advantage of the person contributing the trust property. While the trust can assert that H has a lifetime right to live in the property, beyond that limited right, H is at A’s mercy with respect to how the property is managed. For some parents, the risks associated with this type of trust may far outweigh any benefits to be derived.
D. Conclusion
The term “trust” encompasses many different types of legal arrangements. Trusts can accomplish estate planning objectives that most other documents cannot. While the word “trust” may sound intimidating, they can be appropriate for people of all means. If you have a complicated family situation, you should consider meeting with an attorney to see if a trust helps your situation. Most estate planning attorneys offer a free consultation during which they will evaluate your situation and provide you with the costs for proceeding further.
This article is for informational purposes only and does not constitute legal advice. An attorney client privilege can only be established upon meeting personally. After a discussion of the specific facts during the meeting and the payment and acceptance of a retainer, the attorney client privilege begins.
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